Abstract

In an effort to assess the true effects of higher corn prices, the National Corn Growers Association (NCGA) commissioned an analysis on the impact of increased corn prices on retail food prices. This paper summarizes key results of the study and offers additional analysis based on information from a variety of other sources.

A series of macroeconomic simulations that address the question of what would have happened to the US economy if energy prices had not risen at an extremely rapid rate during 1973 and 1974 is described. The results show that the Congressional Research Service estimate that the higher prices reduced the real output of the economy by $100 billion by the middle of 1975 is a vast overestimate and that a more realistic estimate is in the range of $14 to 45 billion. It is shown that fiscal policy adjustments (lower government spending because of lower prices) have minor effects onmore » the impacts of lower energy prices but the extent of the impacts are closely related to the course of monetary policy. The monetary authorities can significantly reduce the impact of higher energy prices if they choose to do so and if the state of the economy will allow them to do so. Finally, it is demonstrated that the effects of energy price changes can be separated into direct price effects and income effects. The price effects are those directly associated with higher energy costs while the income effects are those that result from lower output and employment decisions which in term result from higher energy costs and reduced demand. The ratio of the price effects to the total effects are in range of 1 to 1.5 where accommodating monetary policy is undertaken and the range of 1.5 to 3.5 where accommodating monetary policy is not undertaken.« less

A key finding of this study is that consumer expectations respond to the volatility in retail gasoline prices. Historical price trends can be characterized as a series of rapid steps separated by varying periods of relative stability. The behavorial models investigated here imply that consumer response to downward steps is constrained by the effect of the longer-term (less volatile) trends. The response to upward steps is, however, essentially unconstrained in that it can be driven directly through the short-term price trend. The rough trajectory by which retail gasoline prices have climbed historically thus appears to sustain relatively high consumer expectationsmore » for future price levels. In a second point of divergence, analytical efforts also generally employ real price trends. While arguably the basis for decision-making by business planners and analysts, it does not necessarily hold that consumers discount nominal price trends for expected inflation rates in developing their year-ahead price forecasts. An initial review of the SRC data for expected real price increases (expected prices adjusted for the expected inflation rate) identified no consistent relationships, and generally lower correlations, with historical trends in real prices.« less

This research contributes to the study of world oil prices. We examine models of rational producers and consumers. Producers set prices or production quantities to maximize the value of their oil resources. Consumers purchase oil and other commodities to maximize utility. A market solution is a time path of prices and quantities that balances the choices of producers and consumers. Most existing models address pricing implications of alternative descriptions of the technology, organization, and objectives of producers. There has been little study of pricing implications of alternative descriptions of consumer behavior. The accurate description of demand is critical for themore » immediate empirical testing of alternative pricing models and for the projection of future prices. We develop a dynamic model of consumer behavior to improve our ability to address pricing implications of alternative descriptions of consumer technology and objectives. We build several simplified demand models based on this dynamic model of consumer behavior. We combine these models with simplified models of producer behavior. We test the sensitivity of pricing results to alternative assumptions about consumer price expectations and to the use of different functional forms for these models. Based on these tests, we choose two alternative models to represent demand, and we reestimate these models using recent oil market data.We generate and compare price paths for each model, and we discuss implications of these results for the world oil market. We study, in particular, consumers' ability to affect market prices. Finally, we show that price-setting producers have several nearly optimal strategies at their disposal. This gives them an ability to choose pricing strategies based on non-economic factors.« less

This report examines the economics of coal reserve evaluation, federal leasing policies, and severance taxes. Federal leasing policies and state severance taxes (in certain states) affect coal market prices, both directly for federal coal or coals mines in certain states and indirectly as a result of competitive coal markets where price changes in one region affect prices in other regions. The effect of these policies is not to capture fair market value (as it is for an individual owner) but rather to exploit a position of market power by driving up prices and creating monopoly rents.